SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings downgrades the rating on the following bonds issued by
Utah Water Finance Agency, UT (the agency) issued on behalf of the city
of St. George, UT (the city):

The bonds are secured by a first lien on and pledge of revenues of the
city's individual water and sewer systems which each pay a portion of
the debt service costs on the agency's bonds.

KEY RATING DRIVERS

WEAKENED FINANCIALS DRIVE DOWNGRADE: The downgrade to 'AA-' from 'AA'
reflects the deterioration of the city's water system (rated 'A+' by
Fitch), which leads to an overall weakening of the pledged security of
the agency bonds.

COMBINED FINANCIAL PROFILE HEALTHY: The financial metrics of the sewer
system are stronger than those of the water system, and when combined
are solid.

RATE AFFORDABILITY REMAINS: Effective fiscal 2013, the city increased
the water rates and decreased the sewer rates by a commensurate amount
in order to strengthen the finances of the water system. The change has
no affect to customer billing on a combined basis and preserves the
combined systems' overall rate flexibility.

WATER LIMITED OPERATION RISK: As primarily a distribution system that
purchases water from the Washington County Water Conservancy District,
UT (WCWCD) according to a take-and-pay contract, the system has limited
operational risk.

SEWER SERVES LARGER AREA: The sewer system serves a larger regional
service territory that includes both collection and treatment services.

MODERATE DEBT LEVELS: Leverage levels for the combined utilities are
moderate but should improve over the near term given capital needs are
manageable and are expected to require little, if any, additional
borrowing.

RATING SENSITIVITY

IMPROVED WATER FUND MARGINS: Improved financial margins for the water
system consistent with forecast levels are important to maintaining the
rating.

CREDIT PROFILE

St. George covers approximately 71 square miles located about 120 miles
northeast of Las Vegas and 300 miles south of Salt Lake City. The city
serves an estimated population of 74,500 residents. The series 2004A
bonds were partially refunded by the water system's series 2012 bonds
(not rated by Fitch) and WCWCD's water revenue refunding bonds, series
2012A. The remaining maturities include the debt service secured by
water revenues through fiscal 2015 as well as the portion of debt
service secured by sewer revenues through fiscal 2017.

SOLID COMBINED FINANCIAL PROFILE

On a combined basis, debt service coverage for fiscal 2012 was 1.6x and
reserves totaled 898 days of cash. Water system operating results were
weak, including 1.15x coverage (equal to the rate covenant) and 28 days
cash on hand. Water system financial results were negatively affected in
fiscal 2012 from a combination of rising water purchase costs in light
of a decline in available local water and a lag in receipt of annual
WCWCD rebate monies. In fiscal 2012 the city took some of its wells
offline due to recent stricter federal arsenic regulations. This change
led to the city purchasing additional supplies from WCWCD at a higher
cost than historical local production costs. However, because of the new
regulations, purchased water from WCWCD is more economical than the city
treating arsenic present in its own wells.

As a result of its water purchases from WCWCD, the city receives an
annual rebate from WCWCD for the amount exceeding what is needed to
cover designated fixed costs. However, because the WCWCD has a different
fiscal year than the city, there is a one year lag in when the rebates
are accounted for on the system's financial statements. The rebate
related to fiscal 2012 payments of about $1.2 million is more than
double that of the prior year due to more water being purchased and will
be received in fiscal 2013; future rebates are expected to be of
comparable levels.

Liquidity for the water utility has been consistently low due to
significant funding of capital from surplus revenues. However, the sewer
utility has regularly posted strong cash flow, reserve levels, and debt
service coverage and provides a source of equity for the water utility
when needed. In fiscal 2012, the sewer system had coverage of 2.4x and
nearly 4,000 days cash.

RATE CHANGES

Water rates were increased in fiscal 2013 by $6.60 while sewer rates
were decreased by about the same amount. As a result, revenues will be
shifted from the sewer to the water fund while keeping the combined
utility bill the same. According to management, the sewer fund had
accumulated an abundant amount of unrestricted cash balance as allowed
under its service contracts and rates were adjusted to be more in line
with forecast needs. While the water system will benefit from the
increased rates, sewer system performance will likely moderate from
prior strong performance.

LIMITED OPERATIONAL RISK

Operations are limited. The water system is primarily a distribution
system, purchasing the majority of its water from WCWCD. Water purchases
are made on a take-and-pay basis through a contract with WCWCD that runs
into perpetuity. As such, the city pays only for the water it purchases.

MANAGEABLE CAPITAL PLANS

Debt levels are very low on a combined basis at less than $400 per
customer and are expected to decline over time given limited capital
needs and lack of anticipated borrowing. The water system's expected
capital spending over the next five years includes $12.5 million to
increase tank capacity and for various repair and replacement projects,
while sewer needs include about $7.6 million in spending over the next
five years, including $3.4 million for a new line as part of the
widening of Riverside Drive and $1 million for a new monitoring system.

Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria, this action was additionally informed
by information from Creditscope.

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